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Letters of Intent – How Much Detail?

After an interested Buyer has looked over an acquisition target’s preliminary financials and performed some initial due diligence, it is customary in M&A practice for the Buyer to give the Seller a Letter of Intent (“LOI”) outlining the basic terms and conditions of the proposed transaction. One issue rarely discussed in articles and seminars about buying a business
is how detailed the LOI should be.

Obviously, the answer to this question depends on a myriad of factors and each deal is different. Since the LOI is not the final purchase agreement, it will never contain the amount of detail nor the specifics of a definitive purchase and sale agreement but there are compelling arguments either way for making the LOI more, or less, specific. Here are some of the most important considerations.

First, let’s examine making the LOI substantially detailed:

  • It can be argued that a detailed LOI will speed up the acquisition process because a number of significant deal points are agreed to early.
  • Although LOI’s are, for the most part, non-binding, getting the Seller and Buyer to agree early to many of each others important requirements makes it psychologically difficult for either to change position later in the negotiating process.
  • The Buyer is more likely to purchase and receive what the Buyer wants if the Seller knows at an early stage that certain conditions must be met. For example, if the Buyer expects a certain level of cash flow or inventory to be maintained throughout the acquisition process, it will likely obtain that result if the requirement is put on the table sooner rather than later.

Here are some arguments for not delivering a detailed LOI:

  • The more detailed the LOI, the more likely it is that a court may find it to be binding, thus depriving a Buyer of the ability to walk away or to negotiate more detailed terms.
  • An overly detailed LOI may send a message to the Seller or Buyer that the other party will be overly demanding and difficult, or that a deal probably isn’t possible (or both). It may inhibit negotiations which might otherwise resolve an issue.
  • A Seller with a “hot” property, or having several interested Buyers, usually will prefer a straightforward LOI that doesn’t have many conditions and which holds out the likelihood that a relatively quick closing will occur, if the price is in the ball park.

Most commentators focus on the purposes of a LOI and its place in the M&A process. At some point, however, the parties should think about what the LOI will say and how each is likely to react to it. The decision of what to require at the beginning of the process, and before due diligence commences is more complex than is generally recognized.

If you have any questions about LOI, please feel free to contact your Davis & Kuelthau corporate attorney.